Origination fees: A hidden student tax

Origination fees: A hidden student tax
© Greg Nash

Congress has hijacked the discussions around federal student loans, asserting that they are somehow a burden to the government. Considering they generate more than $50 billion in revenue annually, nothing could be further from the truth.

 Most other governmental revenue generators are known by another name: taxes. In fact, there is a tremendous financial burden being unfairly heaped upon students and parents that is finally being recognized.

 Last month, Rep. Susan Davis (D-Calif.), introduced legislation that would eliminate origination fees on federal student loans. Her office estimates that these administrative fees cost borrowers around $1.5 billion per year.


Under sequestration, these administrative fees are scheduled to increase again unless legislators act to change it. Once charged to provide banks incentives to make student loans, now the federal government takes the money for itself while lending directly to students and parents.

Borrowers who seek $10,000 for educational expenses now receive only $9,600 but still pay interest on $10,000. It’s a disgrace.

Sequestration blackened Congress’s eye and illustrated how inept it is at handling its greatest responsibility: the stewardship of government finances. But the pain from that shiner is being felt more by student loan borrowers and college financial aid offices.

Saint Leo University was required to update the origination fee on all loans for the fall that were not disbursed to the borrower by Oct. 1 because Uncle Sam changed the rate. After increases in July and December in 2013, the hidden borrowing cost has increased three times in 15 months. Every rate change means the university must then cancel all loans that have not yet been disbursed and re-award the loans, and then students must repeat the process of accepting them.

In most cases, the monetary amounts of the fee changes are trivial, but it causes greater confusion and headaches for students and parents in an already convoluted process and requires a tremendous amount of the university’s time and resources that could be used for educational purposes. These machinations drive tuition costs higher, and students pay the price — twice.

This is not new. In fact, the National Association of Student Financial Aid Administrators has been calling for an end to loan origination fees for several years, and renewed that message to Congress last summer in its proposals for student financial aid reauthorization. It is promising that Davis, who sits on the House Education Workforce Committee, is listening to these suggestions.

What was supposed to be a public service to provide greater accessibility to a college education for those who lacked other options now preys upon those it’s supposed to help. If covertly siphoning an additional $1.5 billion from its borrowers isn’t the definition of a loan shark, I don’t know what is.

 Federal loans are no longer the best option for some students. Credit.com advises students and parents to shop around on the private loan market because those with good credit scores might find better interest rates and less cumbersome origination fees than the federal 4.292 percent rate plus origination fee. But the poorest families will have no other option but to pay the federal government more.

There are undoubtedly instances in which higher education suffers from administrative bloat, but the cost and administrative burden of constantly increasing student loan origination fees is just one more example of how the government is largely to blame for that. 

Passing Davis’s Fee Free Student Loan Act would be a tremendous start to reining in this monster that surreptitiously perpetuates exactly what it claims to combat.

The bill is not currently scheduled for a vote, but let’s hope that the midterm elections have not derailed any hope it has of making it to the floor this session. Davis has identified and communicated the problem. Now we have to wait and pray that our representatives, red and blue, will take honest action that will help students and families limit their student loan debt.


Kirk is president of Saint Leo University and Clark is assistant vice president of financial aid at Saint Leo University, in Saint Leo, Fla.